Economic growth entails the process of increasing the gross domestic product (GDP) of a country. The growth can be evaluated as an increase in the real gross national product (GNP) or Gross Domestic Product (GDP) over a certain period. When GDP increases, the value of services or goods produced, people can consume more. To increase services and goods, countries should increase their potential to produce. As such, broadly, economic growth entails analyzing the variables that result in a sustained increase in production capacity.
Notably, economic growth directly influences the quality of an individual’s living standards. Increasing the production capacity increases income; hence, consumers can purchase more services and goods. Subsequently, the increased incomes and production work together to increase productivity. This cycle continues while productivity in the production factors speedily increases real GDP. Consequently, job opportunities increase, and the government has more tax revenues for public services.
Subsequently, economic growth and increased production capacity result from capital accumulation, technological changes and increased education levels. If a nation puts its entire resources to generate more services and goods but no resources to accrue capital, the production capacity will remain the same. There is basically an interchange between current increased production and future economic growth. For a nation to attain more future consumption, it must reduce the production of services and goods. The forgone consumption now is the opportunity cost for a better economy.
Sources of Economic Growth
Capital accumulation entails increasing capital resources like physical and human capital. Human capital involves the knowledge and skill that an individual possesses. It may come from work experience or education. Human capital increases significantly when more people learn and engage in productive work. Subsequently, physical capital may involve additions to buildings, machines or equipment. It results in more money per employee, leading to increased productivity. The buildup of physical capital is essential for economic growth and vital in all economic areas.
Technological changes entail innovating and looking for more effective and efficient production means. With new technologies, companies can produce more output at a reduced cost. These lower-cost systems enable companies to provide either greater quantity or lower prices. Technology entails the application of science, particularly for commercial and industrial purposes, to make innovations to the production methods, production machines and products to increase efficiency and production volume, all leading to profit increases and competition advantages (Çalışkan, 2015). Technology helps to facilitate various aspects of life in an economy. It directly improves the accuracy and speed of production and takes over different, more time-consuming and laborious duties. This enables people previously involved in these jobs to engage and invest in different economic sectors. Thus, technological changes contribute significantly to economic growth. Technology facilitates the production of a certain product with less input. Further, countries that efficiently adopt technology in all societal aspects create new employment areas, hence economic growth.
Another source of economic growth is education. Notably, education is the primary source of the rise in living standards (Apostu et al., 2022). This is because education increases the capacity to function and societal development. Further, the more skilled the labor force, the higher the production levels and the more technological advancements. In addition, higher education levels lead to increased wage levels hence high spending. This can involve increased demand which pushes the supply side hence more production in the market. Fostering education leads to a more knowledgeable and skilful population, which puts this acquired information and skills on the market. As such, education has a positive impact on general economic improvement.
Notably, universities play a significant role in promoting sustainable development through knowledge transmission and creating certain competencies in students (Apostu et al., 2022). For instance, universities initiate corporate social responsibility programs to safeguard the environment, develop local communities and fight corruption. In addition, highly educated people have skills and attitudes that positively influence the labor force. First, these people are highly predisposed to entrepreneurship. This has a direct positive influence on economic growth and welfare. Entrepreneurs, particularly educated entrepreneurs, introduce knowledge spilling indirectly or directly. This means they introduce improvement and innovative ideas to the current market practices. In this way, they indirectly stimulate change and a rise in general individual knowledge. Also, this is an effective way of inspiring rivalry and competition. By introducing improvements and new ideas to the markets, the upcoming investors force the current ones to introduce respective changes to maintain their current position in the market places. As a result, entrepreneurship contributes significantly to the economy.
Policies to Enhance the Sources of Economic Growth
The policy that can enhance education as a source of economic growth is a policy in education, such as an equality policy. This can contribute to the generation of human capital, which can counter the forces of falling returns in other production factors like physical capital necessary for economic growth. Besides its direct role as a production factor, human capital and education complement various factors like natural resources and physical capital that determine the level of technological innovations in a nation (Loayza & Soto, 2014). Hence, a policy toward enhancing education and human capital can lead to increased economic growth.
The other policy to promote technological change is in the area of financial depth. There should be the introduction of good financial systems to facilitate long-term growth. Financial systems influence economic growth and economic efficiency through various channels. Financial markets promote risk diversification by pooling, trading and hedging economic instruments (Loayza & Soto, 2014). They help to recognize profitable investment areas and rally savings for them. Further, financial systems can encourage adoption and change in technology by facilitating the capital needed for such activities. In addition, financial systems help monitor organization managers and impose corporate controls, reducing principal-agent issues resulting in inefficient investment. Consequently, financial developments result in more technology adoption and higher economic growth.
The next economic policy should be in the area of international trade openness to facilitate capital accumulation. Trade has a significant role in capital accumulation and economic growth (Loayza & Soto, 2014). First, trade results in higher specialization; hence, countries should exploit their comparative advantage area to advance in total factor productivity (TFP). Also, trade expands potential markets, enabling domestic companies to benefit from economies of scale and increasing their TFP. Further, trade diffuses enhanced managerial practices and technological innovations through better interactions with overseas markets and firms. Lastly, trade liberalizations decrease the incentives for companies to carry out unproductive activities, improving economic growth.
The Negative Impacts of Economic Growth
Although economic growth has indisputably been a positive influence, it still has adverse effects. Economic growth has various negative impacts, including environmental costs and income inequality. Notably, it can be possible to fix financial crises over time since their effect is not collective. However, damaging the environment can be irreversible once it reaches a tipping point. Higher outputs result in increased congestion and pollution, which can decrease the living standards, for instance, more breathing problems and wasting time in traffic jams because of pollution congestion, respectively (Kozluk & Zipperer, 2015). In addition, an increase in the consumption of non-renewable energy resources may put costs on incoming generations.
Subsequently, economic growth may cause income inequality. This happens because economic growth results in more benefits to the more affluent people, those owning assets and have well-paying jobs. With sufficient redistribution policies, wealthy people tend to gain more wealth at an increased rate compared to the economic growth rate since they can reinvest their bonuses.
One policy that would counter environmental costs caused by economic growth is the consumption of renewable sources to reduce pollution that contributes to the destruction of the ozone layer. Companies can achieve economic growth free from pollution by focusing on more environmentally friendly production methods (Kozluk & Zipperer, 2015). The other policy to counter income inequality is to increase the earned income tax. This can help to pull most families out of poverty and offer more economic support to poor people. Wealthy people will be required to pay more in federal taxes compared to low-income people hence an effective way of resolving the income inequality issue.
From this assignment, I have learnt that economic growth has many benefits. However, I have noticed that the impact of economic growth relies on various factors like the nature of growth, whether that growth is sustainable and whether it causes harm to the environment. Going forward, I will apply this knowledge by focusing on the aspects of economic growth that make it desirable, like advocating for environmental protection.
Apostu, S. A., Mukli, L., Panait, M., Gigauri, I., & Hysa, E. (2022). Economic Growth through the Lenses of Education, Entrepreneurship, and Innovation. Administrative Sciences, 12(3), 74.
Çalışkan, H. K. (2015). Technological change and economic growth. Procedia-Social and Behavioral Sciences, 195, 649-654.
Kozluk, T., & Zipperer, V. (2015). Environmental policies and productivity growth: a critical review of empirical findings. OECD Journal: Economic Studies, 2014(1), 155-185.
Loayza, N., & Soto, R. (2014). The sources of economic growth: An overview. Series on Central Banking, Analysis, and Economic Policies, no. 6.